direction. Wholesale inflation rates are down to a 9-month low from 7.52% in November to 4.68% in February, and consumer price inflation is down to a 2-year low from 11.16% in November to 8.1% in February. Indeed, since much of the fall was due to a collapse in vegetable prices that are not influenced by monetary policy, there is an argument to be made that RBI hiked rates when the problem was a transient one. The other reason for cutting rates is that with credit demand in the economy simply refusing to pick up—it grew 14.6% in February 2014 versus 16.1% a year ago—banks are not only refusing to pass on interest rate hikes to customers, they are even cutting interest rates. Interest rates are driven by market conditions, not just by RBI hiking rates.

But, those opposed to rate cuts argue, core inflation continues to remain elevated. So, were demand to return, there will once again be inflationary pressures that could easily flare up in an easy monetary policy regime. The problem with this argument is that with the rupee appreciating, along with softening of global commodity prices—which will be helped by China’s further slowing—the pressure of imported inflation is anyway diminishing. Nor is it correct to say that core inflation is not responding. It is stickier than headline inflation, but in the case of CPI, ex-fuel core inflation is down from 11.6% in November to 8.3% in February. The larger point is, apart from food inflation—which doesn’t respond to monetary policy anyway—there are few signs of significant demand pressures that can cause inflation to rise anyway.

How RBI chooses to react depends, in a large manner, on what its strategy is. If it remains one biased towards inflation targeting—something the finance minister is clear he has rejected—then the central bank may be tempted to keep interest rates at elevated levels. Consumer inflation levels of 6% over the next two years will require CPI-inflation levels in manufactured products to come down a lot more than what they are today. RBI may also want to see how the rupee behaves. If, for instance, there is no stable government after the elections and FIIs start pulling out, the rupee could depreciate and put pressure on inflation. The converse, though, is